Monday, October 31, 2011

More Darwinism in capitalism (against „corporate communism“)

More Darwinism in capitalism (against „corporate communism“)
- draft - to be continued later
Dear reader,

just by reading the headline you might get initially shocked because of reading the word Darwinism. It has a negative conjunction in connection with human society and even was considered for extremist behavior which even resulted in mass killings because of ideology based on Darwinism to be implemented as guideline for how society should work. Resulting in segregation even racism. Well the author most vigorously condemns such a society based on inhuman pseudo scientific „natural“ behavior. But on the other hand such a vigorous selection of the fittest should reapply for the financial world again where there are two sides once connected and where artificial procedures lead the way to massive wrongdoings.

These two principles are:

The higher the risk the higher the possible yield

And there is (financial) reward for successful business vs punishment for unsuccessful business models.

Compare those „old fashioned“ rules of capitalism to the current events taking place in the financial world where massive risks are being chopped up, bundled and diluted and when such a business model runs out of idiots willing to buy such risks it is not collapsing or those who responsible are punished in whatever ways .. no ..one declares the volume of such bad business as „vital“ for financial system to work as a whole .. and punishment of it would lead to inevitable collapse of the whole system (meltdown). And on top of this blackmail practices it is demanded that the losses have to be compensated for by the state as representative for all citizens and the states should not dare to think of abolishment of this system after coming to the rescue.



Of course the argument for global meltdown isn't that far fetched looking back to the 1920s and 30s where failure of coordinated action between states led to the common withdrawal of funds because of mutual distrust and resulted in spiraling unwittingly into a economic abyss. This lack of coordination was seen in the dramatic events of 2008 after bear sterns collapsed, fanny mae & freddy mac had to be taken over by US government and when after the sudden collapse of Lehman Bros , AIG Group was next on the list of collapsing with some 1200 bn $ on its balance sheet almost doubling that of Lehman. The governments worldwide luckily already formed a club of 8 or even 20 most important economies of the globe with regular meetings with issues how to further improve mutual trade & prosperity. So it wasn't that hard to take up immediate coordination of legislation, unorthodox short term measures and even take up the task to confront the TV cameras of their nations in order to calm down their worried citizens.

This public outing was in sharp contrast to the behavior of those responsible for the crisis by building up ever larger risks by also misleading judgments on their „quality“ and therefore acts of deception for possible clients of products stinking otherwise to high heaven. Bankers were successfully handing out clothes pegs for their customers and for the rest were confident enough that money isn't smelling even if it is stained. Those in charge of creating ever more derivatives on existing financial products were nowhere to be seen … hiding in their towers and avoiding TV cameras. But not sitting behind their desk hoping for the best which is that not everything including their financial institution will go down the drain. No they took a more proactive stance to this crisis and called up their pawns in the governments and legislation bodies in order to prevent total collapse (which can even be considered as a useful and merciful act also for their fellow citizens) but also to make even more profits or at least securing the calculated profits of their failing products.

To jump back in time to those years of real worldwide meltdown the bankers then had no opportunity to find politicians coming to their rescue or to the rescue of their nation or the world as a whole. What bankers back then did on crash of the stock market and other markets was to also share the mood of total desperation and some of them also took their own life by jumping out of their office window. Although this seems to be harsh punishment it was deemed to be remembered by their surviving comrades and might have helped to avoid a repetition of such a situation within their remaining life span. Unfortunately neither the partial fatal consequences of those crash times nor the overall economic downturn remained in peoples living memory or should say fortunately it didn't repeat itself within one or two generations ? However from historic data such as newspapers news on film or history books we know the facts but still have problems to pick up the then existing mood emotionally since we managed to avoid such a state of years of depression (so far).

So compared to the old days those responsible of failure not only affecting their personal finances nor their clients nor their companies equity but also taxpayers money and thee economy as whole came off the newly created disaster relatively unharmed. Moreover it must be questioned if there were really enough consequences drawn out of the situation in fall of 2008 where subprime mortgage crisis was initial black hole that triggered other fields to collapse or to expose real „pure“ ponzi schemes being able to keep afloat among all those financial products out of control of any supervision. Of course by mentioning ponzi scheme i refer to the one most famous and most comprehensive with an estimated volume of some 55 bn $ which was connected to thee name of Madoff. So his clients forced to withdraw some sums in order to make up for other losses on the „legit“ market triggered the exposure of this ponzi scheme by interrupting the necessary constant influx of new money in order to pay out the dividends clients got so used to over the years of around 10 %. Not bad but also just reasonable enough not to draw attention on the one hand or to let the scheme crash within just a few month. We all know what became of miracle financial zampano Madoff. He is now serving some time (165 years ?) and his company was wiped out completely leaving thousands of clients without any funds from it so far. Although it is rather unpleasant for this former CEO this obvious designed to collapse „business model“ was allowed to fail and its creator was allowed to feel the consequences of it not only by losing some bonus payments but by losing all personal wealth (or that claimed by his wife) and he had to adapt to much smaller space of living and much more regulated daily schemes.

So what difference did it make to create other financial products also perhaps promising 10% yield and „low risk“ by paying a well known rating agency to come to such a conclusion in order to get the product sold ? What is the fundamental difference between Madoff and others which depended on the influx of money to be able to keep their system afloat and by doing so themselves paying a good bonus and shareholders an acceptable dividend. So who payed for their fortune ? Not the unlucky bastard bitten in the end for financial products obviously just representing junk value ?

Is the difference in approach (punishment vs pampering) perhaps that same involved institutions are also responsible to give ratings and take over the selling of „state junk“ in the form of bonds to uphold budgets with large deficits uncovered by lack of revenues or overshooting spendings or even worse: both ? As to support this theory one can look to Standard & Poors CEO who dared to give a negative outlook on the USA bonds. So already are other overseas rating agencies handle same measurements for all countries they analyze regardless of their importance or their past. So for Greece or Spain with a negative outlook for being able to pay back loans they find same judgments for good old uncle sam. Of course the CEO of Standard & Poors suddenly remembered that he should spent more time with his family instead of making a big fuzz about creditworthiness of uncle sam but some people see some connection. So have our states turned a blind eye to some developments in order to uphold a system also favorable for themselves. Probably the answer is: Yes. So might there also be a defect in politics not only in allowing deregulation but also in blocking punishment when the resulting misfortune did strike ? Possibly … But much more than the lack of judicial punishment is upsetting some „old school capitalist“ (guess what i am) which is that those responsible are still left in office and still offer „solutions“ to the one problem originating in their very own brain and therefore missing the chance of other probably more successful successors getting in their position and therefore sparing shareholders and taxpayers alike more misery. What is thee big difference to communism when the whole society has to pay the price for failure of the „planners“ „apparatschicks“ , „burocrats“ or however you want to call them when they refuse to give way to more competent people, trying to cover up own wrongdoings and socializing their losses to others. When as a result of that state budgets are blown out of proportion, taxes have to be elevated and other good, profit making companies have to pay up for mistakes made by others ? If as a result consumers have to stick with companies being supported for perhaps many years with still outmarketed products and still well selfrewarding losers on their top ? OK that doesn't abolish market economy as such and degenerates it into communist style management of scarcity but it isn't also the well known and well working old fashioned capitalism either, don't you agree ?

And i order not to just put the spotlight on the financial market but also to other segments of our economy i would like to remind everyone to the saving procedure of GM and others thought to be only suffering from the frozen up loans during financial crisis of 2008. As if potential buyers of GM
cars only didn't engage in buying those outdated gasoline swallowing trucks because of many banks refused them additional loans besides those of their house already under water because of slump of housing market. What did newly created „government motors“ think they were doing when they or their genius CEO & board members was given a second chance to go on building cars already proven to be out of touch with reality or to be more specific out of touch with historic high prices of oil & therefore gas. So US govt. took over the task of saving a company otherwise destined to fail because of missed chances of adapting their products to the markets (not only US) needs. So in fact US govt. Acted on behalf of one failing corporation possible preventing another one highly innovative perhaps in the state of California to make the long due breakthrough in modern means of individual transportation. Not necessarily but possibly !

Although some argue that some rescue operations had to be performed in order not to let the whole system spiral out of control and in consequence end up in total collapse. But it would also mean to look at the individual situation of those companies on the list to be saved. So with GM was it given that Chrysler or other US car makers were also in danger of going out of business or would it have even been beneficial to others because they could have then taken over the market share of GM. At least that is “capitalism 1+1” we grew up with but what some politicians might have forgotten because they see only short term effect by possibly losing their electorate.

- draft – to be continued

References:

Ratings:
http://www.welt.de/finanzen/article13690207/Wer-mehr-bezahlt-bekommt-bessere-Rating-Noten.html (ger)

US "cases":
http://www.forbes.com/2010/04/23/general-motors-economy-bailout-opinions-columnists-shikha-dalmia.html
http://news.bbc.co.uk/2/hi/8645945.stm

http://uk.reuters.com/article/2010/04/28/us-goldman-levin-blankfein-idUSTRE63R03320100428
http://en.wikipedia.org/wiki/Federal_takeover_of_Fannie_Mae_and_Freddie_Mac
http://en.wikipedia.org/wiki/Madoff_investment_scandal
http://money.cnn.com/2008/03/28/magazines/fortune/boyd_bear.fortune/
http://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothers
http://www.guardian.co.uk/business/2008/sep/18/wallstreet.georgebush
http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
Nov 28th Secret Fed Loans Gave Banks Undisclosed $13B
Nov 29th You Won't Believe What Hank Paulson Revealed To Hedge Funders Right Before The Height Of The Financial Crisis
Dec 16th Bank Failures Cost U.S. $88 Billion 
Dec 27th SEC Ups Its Game to Identify Rogue Firms

german "cases":
http://en.wikipedia.org/wiki/Philipp_Holzmann (eng)
http://de.wikipedia.org/wiki/Philipp_Holzmann (ger)
http://news.bbc.co.uk/2/hi/7574169.stm (eng)

dutch/belgian "cases"
Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)